Five Forces Analysis of Indian IT Service Industry

One of the key contributors to India's GDP is the services sector. Over the years India has moved from an agricultural based economy to a service based economy. The service based sector contributes to close to 55% to the GDP. This sector has not only lifted the Indian economy but has also attracted huge investments in form of FDIs and FIIs. And one of the key contributors to the services sector is the Indian IT Services sector. This post we would be performing the Five Forces Analysis of Indian IT Service Industry.

History of the Indian IT Services Industry

The Indian IT services sector has been there from the early post independence era. If you see, company like Tata Consultancy Services and Infosys were setup in 1968 and 1981 respectively. However there wasn't much contribution at that point of time. Then in 1991, the Indian economy opened up and allowed foreign players to come in. That also provided access to Indian IT services companies to find customer across the seven seas. Indians soon became one of the most favored destination for outsourcing IT work. This was primarily due to the following reasons:

Our education system was in good shape, we had educated and skilled engineers

English as a language was not a barrier as our engineers spoke well

And lastly, the 12 hour time difference mean that, companies were able to work round the clock.

Ever since the Indian IT services industry has seen tremendous growth. So much that India is the world's largest sourcing destination, accounting for approximately 55 per cent of the US$ 185-190 billion market in 2017-18. So in this post we will analyse perform the Five Forces Analysis of the Indian IT Industry.

Indian IT Service Industry advantages. Image Courtesy: IBEF

Five Forces Analysis of Indian IT Service Industry

Threat to new Entrants

Threat to new entrants is pretty low in the Indian IT service landscape. One of the major reason being that the deals that come in have a certain ticket size. And not every company will be able to deal with a project at that scale. Moreover there are about 4-5 players which have built the capability to deal with multi-million dollar deals. The startup culture is there, but these startups play in a very niche field. Things like Fintech, AgriTech to Deep Neural Networks are the areas these startups deal with. So in a way there is barrier to entry created by the large corporations which makes it difficult for any new entrant to come in and take the project.

Bargaining Power of the Customer

The bargaining power of the customer is high. That is primarily because of the Indian IT services companies that are capable of handling work of that nature and size. Thought there are only a handful of them, the customers have a sizable option to choose from as each company gets something different on the table.

Porter's Five Forces Model. Image Courtesy: Visual Paradigm

Bargaining Power of the Suppliers

This one can be debatable. For instance if we talk about software vendors who are providing licensed software. These vendors do give bulk licenses to the Indian IT services companies but still they are in a position to demand a price for the software they provide. On the other hand you have the hardware manufacturers who can't really be in a commanding position because of the sheer size of orders that are placed for hardware components. And moreover with Cloud services kicking in, this model is got to change. With these different view points, what do you think, how is the bargaining power of the suppliers ?

Industry Rivalry

The industry rivalry is a high force in the Indian IT Services industry landscape. As mentioned earlier, there are only a handful of large IT services companies and there is rivalry between them in terms of the deals they win, the market share they grab, the bottom line they are able to showcase. In way this high industry rivalry has also helped the Indian IT services sector to grow as it paved way for innovation and each company came up with innovative solutions.

Threat of Substitutes

At the current economic condition when the economies of the world are slowing down, there is high chances of substitution. Other world economies like Philippines are bidding for IT services projects globally as they are able to provide the work at a cost cheaper than the Indians. Also if you think, the companies that are giving the projects to the Indian IT services industry, can do a backward integration and setup their own IT solution company. For instance IBM, Accenture etc These companies were primarily consulting companies at one point and today they boast of their IT solution arm. Both of them having off shore centres to cater to the world.

That was the Five Forces Analysis of the Indian IT Services Industry. The industry is at a crucial stage with the clients now moving to digital technologies. The service companies are going all in to re-skill their employees on new emerging technologies like Artificial Intelligence, Machine Learning, Data Science etc. What the future holds ? Only time will tell.

Five Forces Analysis of Indian IT Service Industry
Reviewed by The Executive
on
April 08, 2019
Rating: 5